NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, the accompanying consolidated financial statements of Tredegar Corporation and its subsidiaries (“Tredegar,” “the Company,” “we,” “us” or “our”) contain all adjustments necessary to state fairly, in all material respects, Tredegar’s consolidated financial position as of
June 30, 2019
, the consolidated results of operations for the
three and six
months ended
June 30, 2019
and
2018
, the consolidated cash flows for the
six months
ended
June 30, 2019
and
2018
, and the consolidated changes in shareholders’ equity for the
six months
ended
June 30, 2019
and
2018
, in accordance with U.S. generally accepted accounting principles (“GAAP”). All such adjustments, unless otherwise detailed in the notes to the consolidated interim financial statements, are deemed to be of a normal, recurring nature.
The Company operates on a calendar fiscal year except for the Aluminum Extrusions segment, which operates on a 52/53-week fiscal year basis. As such, the fiscal
second quarter
for 2019 and 2018 for this segment references 13-week periods ended June 30, 2019 and June 24, 2018, respectively. The Company does not believe the impact of reporting the results of this segment as stated above is material to the consolidated financial results.
The financial position data as of
December 31, 2018
that is included herein was derived from the audited consolidated financial statements provided in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
(“
2018
Form 10-K”) but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the
2018
Form 10-K. The results of operations for the
three and six
months ended
June 30, 2019
, are not necessarily indicative of the results to be expected for the full year. Certain prior year balances have been reclassified to conform with current year presentation.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(In thousands)
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
34,660
|
|
|
$
|
34,397
|
|
Restricted cash
|
5,109
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
$
|
39,769
|
|
|
$
|
34,397
|
|
Restricted cash as of June 30, 2019 consists of a deposit received in the second quarter of 2019 for the sale of the PE Films idle manufacturing facility in Shanghai, China, which sale closed in the third quarter of 2019. An amount offsetting the deposit is recorded as a current liability in accrued expenses. Chinese government regulations limit the use of these funds to the purposes of the liquidating entity until the completion of the liquidation process, which the Company expects to be concluded within the next twelve months.
As of
June 30, 2019
and December 31, 2018, accounts receivable and other receivables, net, were
$116.4 million
and
$124.7 million
, respectively, made up of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(In thousands)
|
2019
|
|
2018
|
Customer receivables
|
$
|
115,522
|
|
|
$
|
122,182
|
|
Other accounts and notes receivable
|
4,054
|
|
|
5,482
|
|
Total accounts and other receivables
|
119,576
|
|
|
127,664
|
|
Less: Allowance for bad debts and sales returns
|
(3,206
|
)
|
|
(2,937
|
)
|
Total accounts and other receivables, net
|
$
|
116,370
|
|
|
$
|
124,727
|
|
For the three and
six months ended
June 30, 2019
, the Company had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheets as of
June 30, 2019
. Payment terms start from the date of satisfaction of the performance obligation and vary from COD (cash on delivery) to 120 days. The Company’s contracts generally include one performance obligation, which is satisfied at a point in time.
For the three and
six months ended
June 30, 2019
, revenue recognized from performance obligations related to prior periods (for example, changes in transaction price), was not material.
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding i) revenue pertaining to contracts that have an original expected duration of one year or less, ii) contracts where revenue is recognized as invoiced and iii) variable consideration related to unsatisfied performance obligations, is not expected to materially impact the Company’s financial results.
|
|
3
|
GAINS AND LOSSES ASSOCIATED WITH PLANT SHUTDOWNS, ASSET IMPAIRMENTS AND RESTRUCTURINGS, SALES OF ASSETS AND OTHER ITEMS
|
Plant shutdowns, asset impairments, restructurings, sales of assets and other items are shown in the net sales and operating profit by segment table in Note 11 and are also included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income, unless otherwise noted below.
Plant shutdowns, asset impairments, restructurings and other items in the
second quarter
of
2019
include:
|
|
•
|
Pretax charges of
$2.0 million
for professional fees associated with remediation activities and other costs relating to the Company’s material weaknesses in internal control over financial reporting, business development activities, and implementation of new accounting guidance (included in “Selling, general and administrative expenses” in the consolidated statements of income);
|
|
|
•
|
Pretax charges of
$1.0 million
associated with the consolidation of certain PE Films manufacturing activities in the U.S. and Europe for its Personal Care business component, including the eventual shutdown of the facility in Lake Zurich, Illinois and the transfer of its production of elastics materials to the new elastics production lines in Terre Haute, Indiana. The pretax charges are comprised of severance and other employee-related accrued costs of
$0.4 million
(
$0.3 million
for Lake Zurich), asset impairments of
$0.3 million
(
$0.2 million
for Lake Zurich) and accelerated depreciation of
$0.3 million
for Lake Zurich (included in “Cost of goods sold” in the consolidated statements of income);
|
|
|
•
|
Pretax charges of
$0.1 million
for severance and other employee-related costs associated with other restructuring activities in PE Films;
|
|
|
•
|
Pretax charges of
$0.2 million
related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income); and
|
|
|
•
|
Pretax charges of
$0.3 million
associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of other facility-related costs.
|
Plant shutdowns, asset impairments, restructurings and other items in the first
six months
of
2019
include:
|
|
•
|
Pretax charges of
$2.9 million
for professional fees associated with remediation activities and other costs relating to the Company’s material weaknesses in internal control over financial reporting, business development activities, and implementation of new accounting guidance (included in “Selling, general and administrative expenses” in the consolidated statements of income);
|
|
|
•
|
Pretax charges of
$1.0 million
associated with the consolidation of certain PE Films manufacturing activities in the U.S. and Europe for its Personal Care business component, including the eventual shutdown of the facility in Lake Zurich, Illinois and the transfer of its production of elastics materials to the new elastics production lines in Terre Haute, Indiana. The pretax charges are comprised of severance and other employee-related accrued costs of
$0.4 million
(
$0.3 million
for Lake Zurich), asset impairments of
$0.3 million
(
$0.2 million
for Lake Zurich) and accelerated depreciation of
$0.3 million
for Lake Zurich (included in “Cost of goods sold” in the consolidated statements of income);
|
|
|
•
|
Pretax charges of
$0.4 million
for the write-off of a Personal Care production line at PE Films’ Guangzhou, China facility;
|
|
|
•
|
Pretax charges of
$0.5 million
for severance and other employee-related costs associated with restructurings in PE Films;
|
|
|
•
|
Pretax charges of
$0.4 million
related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income); and
|
|
|
•
|
Pretax charges of
$0.5 million
associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of other facility-related costs.
|
Plant shutdowns, asset impairments, restructurings and other items in the second quarter of 2018 include:
|
|
•
|
Pretax charges of
$0.6 million
related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income); and
|
|
|
•
|
Pretax charges of
$0.7 million
associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related accrued costs of
$0.4 million
, accelerated depreciation of
$0.1 million
(included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of
$0.2 million
.
|
Plant shutdowns, asset impairments, restructurings and other items in the first six months of 2018 include:
|
|
•
|
Pretax charges of
$1.5 million
related to estimated excess costs associated with the ramp-up of new product offerings and additional expenses related to strategic capacity expansion projects by PE Films (included in “Cost of goods sold” in the consolidated statements of income);
|
|
|
•
|
Pretax charges of
$0.3 million
for professional fees associated with the Terphane Limitada worthless stock deduction, the impairment of assets of Flexible Packaging Films and determining the effect of the new U.S. federal income tax law (included in “Selling, general and administrative expenses” in the consolidated statements of income); and
|
|
|
•
|
Pretax charges of
$0.7 million
associated with the shutdown of PE Films’ manufacturing facility in Shanghai, China, which consists of severance and other employee-related accrued costs of
$0.4 million
, accelerated depreciation of
0.1 million
(included in “Cost of goods sold” in the consolidated statements of income) and other facility consolidation-related expenses of
$0.2 million
.
|
Results on the Company’s investment in kaléo, Inc. (“kaléo”), which is accounted for under the fair value method, in the
second quarter
and first
six months
of
2019
included gains of
$7.1 million
(
$5.6 million
after taxes) and
$24.2 million
(
$19.9 million
after taxes), which included a
$17.6 million
dividend, respectively, compared to gains of
$5.8 million
(
$4.5 million
after taxes) and
$14.0 million
(
$10.9 million
after taxes) in the
second quarter
and first
six months
of
2018
, respectively (included in “Other income (expense), net” in the consolidated statements of income). See Note 7 for additional information on investments.
The Company plans to close its PE Films manufacturing facility in Lake Zurich, Illinois, which produces elastic materials. Production at the Lake Zurich plant is expected to cease during the fourth quarter of 2019 with product transfers to the new elastic production line at Terre Haute, Indiana. As a result of this plant closure, the Company expects to recognize pre-tax cash costs of
$7.6 million
associated with these activities comprised of (i) customer-related costs (
$0.7 million
), (ii) severance and other employee related costs (
$1.8 million
), and (iii) asset disposal and other cash costs (
$5.1 million
). In addition, the Company expects non-cash asset write-offs and accelerated depreciation of
$1.6 million
. Proceeds from the expected sale of Lake Zurich’s real property are estimated at approximately
$5 million
. The Company anticipates that these activities will be completed by the end of 2020.
The Company plans to consolidate the production of certain PE Films personal care products in Europe over the next twelve months. As a result of this consolidation, the Company expects to recognize pre-tax cash costs of
$1.7 million
, primarily for severance and customer-related costs.
In June 2018, the Company announced plans to close its facility in Shanghai, China, which primarily produced plastic films used as components for personal care products (“Shanghai transition”). Production ceased at this plant during the fourth quarter of 2018. Total expenses associated with the Shanghai transition are
$3.8 million
since project inception. Cash expenditures were
$0.3 million
and
$0.5 million
in the three and
six months
ended
June 30, 2019
, respectively, and
$3.0 million
since project inception. An additional
$0.5 million
of cash expenditures is expected to be needed to complete the project, primarily for severance and other employee related costs. Proceeds from the sale of the plant facilities, which occurred in the third quarter of 2019, are expected to be
$6.5 million
, net of related expenses.
A
reconciliation of the beginning and ending balances of accrued expenses associated with
exit and disposal activities and charges associated with asset impairments
and reported as “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the consolidated statements of income for the
six months ended
June 30, 2019
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Severance
(a)
|
|
Asset Impairments
|
|
Other
(b)
|
|
Total
|
Balance at January 1, 2019
|
$
|
616
|
|
|
$
|
—
|
|
|
$
|
160
|
|
|
$
|
776
|
|
Changes in 2019:
|
|
|
|
|
|
|
Charges
|
968
|
|
|
695
|
|
|
468
|
|
|
2,131
|
|
Cash payments
|
(677
|
)
|
|
—
|
|
|
(523
|
)
|
|
(1,200
|
)
|
Charges against assets
|
—
|
|
|
(695
|
)
|
|
—
|
|
|
(695
|
)
|
Reversed to income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at June 30, 2019
|
$
|
907
|
|
|
$
|
—
|
|
|
$
|
105
|
|
|
$
|
1,012
|
|
(a) Severance cash spent primarily includes severance payments associated with PE Films’ exit and disposal activities.
(b) Other primarily includes other restructuring costs associated with the Shanghai plant shutdown.
|
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(In thousands)
|
2019
|
|
2018
|
Finished goods
|
$
|
28,755
|
|
|
$
|
24,938
|
|
Work-in-process
|
14,957
|
|
|
15,648
|
|
Raw materials
|
29,745
|
|
|
33,741
|
|
Stores, supplies and other
|
19,902
|
|
|
19,483
|
|
Total
|
$
|
93,359
|
|
|
$
|
93,810
|
|
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted average shares outstanding used to compute basic earnings per share
|
33,270
|
|
|
33,074
|
|
|
33,197
|
|
|
33,028
|
|
Incremental dilutive shares attributable to stock options and restricted stock
|
8
|
|
|
34
|
|
|
6
|
|
|
20
|
|
Shares used to compute diluted earnings per share
|
33,278
|
|
|
33,108
|
|
|
33,203
|
|
|
33,048
|
|
Incremental shares attributable to stock options and restricted stock are computed under the treasury stock method using the average market price during the related period. For the three and
six months ended
June 30, 2019
, average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were
1,474,762
and
1,225,333
, respectively. For the three and
six months ended
June 30, 2018
, average out-of-the-money options to purchase shares that were excluded from the calculation of incremental shares attributable to stock options and restricted stock were
215,903
and
264,868
, respectively.
|
|
6
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the
six months ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign
currency
translation
adjustment
|
|
Gain (loss) on
derivative
financial
instruments
|
|
Pension and
other
post-retirement
benefit
adjustments
|
|
Total
|
Beginning balance, January 1, 2019
|
$
|
(96,940
|
)
|
|
$
|
(1,601
|
)
|
|
$
|
(81,446
|
)
|
|
$
|
(179,987
|
)
|
Other comprehensive income (loss) before reclassifications
|
(283
|
)
|
|
(1,218
|
)
|
|
—
|
|
|
(1,501
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
1,486
|
|
|
4,158
|
|
|
5,644
|
|
Net other comprehensive income (loss) - current period
|
(283
|
)
|
|
268
|
|
|
4,158
|
|
|
4,143
|
|
Ending balance, June 30, 2019
|
$
|
(97,223
|
)
|
|
$
|
(1,333
|
)
|
|
$
|
(77,288
|
)
|
|
$
|
(175,844
|
)
|
The following table summarizes the after-tax changes in accumulated other comprehensive income (loss) for the
six months ended
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Foreign
currency
translation
adjustment
|
|
Gain (loss) on
derivative
financial
instruments
|
|
Pension and
other
post-retirement
benefit
adjustments
|
|
Total
|
Beginning balance, January 1, 2018
|
$
|
(86,178
|
)
|
|
$
|
459
|
|
|
$
|
(90,950
|
)
|
|
$
|
(176,669
|
)
|
Other comprehensive income (loss) before reclassifications
|
(8,905
|
)
|
|
(829
|
)
|
|
—
|
|
|
(9,734
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
|
(361
|
)
|
|
5,223
|
|
|
4,862
|
|
Net other comprehensive income (loss) - current period
|
(8,905
|
)
|
|
(1,190
|
)
|
|
5,223
|
|
|
(4,872
|
)
|
Ending balance, June 30, 2018
|
$
|
(95,083
|
)
|
|
$
|
(731
|
)
|
|
$
|
(85,727
|
)
|
|
$
|
(181,541
|
)
|
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income (loss) for the
three months ended
June 30, 2019
are summarized as follows:
|
|
|
|
|
|
|
(In Thousands)
|
Amount
reclassified from
other
comprehensive
income (loss)
|
|
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
|
Gain (loss) on derivative financial instruments:
|
|
|
|
Aluminum future contracts, before taxes
|
$
|
(606
|
)
|
|
Cost of sales
|
Foreign currency forward contracts, before taxes
|
(369
|
)
|
|
Selling, general & administrative
|
Foreign currency forward contracts, before taxes
|
16
|
|
|
Cost of sales
|
Total, before taxes
|
(959
|
)
|
|
|
Income tax expense (benefit)
|
(131
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(828
|
)
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(2,672
|
)
|
|
(a)
|
Income tax expense (benefit)
|
(593
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(2,079
|
)
|
|
|
|
|
(a)
|
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
|
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income (loss) for the
six months ended
June 30, 2019
are summarized as follows:
|
|
|
|
|
|
|
(In thousands)
|
Amount
reclassified from
other
comprehensive
income (loss)
|
|
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
|
Gain (loss) on derivative financial instruments:
|
|
|
|
Aluminum future contracts, before taxes
|
$
|
(1,223
|
)
|
|
Cost of sales
|
Foreign currency forward contracts, before taxes
|
(560
|
)
|
|
Selling, general & administrative
|
Foreign currency forward contracts, before taxes
|
31
|
|
|
Cost of sales
|
Total, before taxes
|
(1,752
|
)
|
|
|
Income tax expense (benefit)
|
(266
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(1,486
|
)
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(5,343
|
)
|
|
(a)
|
Income tax expense (benefit)
|
(1,185
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(4,158
|
)
|
|
|
|
|
(a)
|
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
|
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the
three months ended
June 30, 2018
are summarized as follows:
|
|
|
|
|
|
|
(In Thousands)
|
Amount
reclassified from
other
comprehensive
income (loss)
|
|
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income (loss) to net
income (loss)
|
Gain (loss) on derivative financial instruments:
|
|
|
|
Aluminum future contracts, before taxes
|
$
|
712
|
|
|
Cost of sales
|
Foreign currency forward contracts, before taxes
|
(378
|
)
|
|
Selling, general & administrative
|
Foreign currency forward contracts, before taxes
|
16
|
|
|
Cost of sales
|
Total, before taxes
|
350
|
|
|
|
Income tax expense (benefit)
|
142
|
|
|
Income taxes
|
Total, net of tax
|
$
|
208
|
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(3,372
|
)
|
|
(a)
|
Income tax expense (benefit)
|
(761
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(2,611
|
)
|
|
|
|
|
(a)
|
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
|
Reclassifications of balances out of accumulated other comprehensive income (loss) into net income for the
six months ended
June 30, 2018
are summarized as follows:
|
|
|
|
|
|
|
(In thousands)
|
Amount
reclassified from
other
comprehensive
income (loss)
|
|
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
income to net
income
|
Gain (loss) on derivative financial instruments:
|
|
|
|
Aluminum future contracts, before taxes
|
$
|
944
|
|
|
Cost of sales
|
Foreign currency forward contracts, before taxes
|
(419
|
)
|
|
Selling, general & adminstrative
|
Foreign currency forward contracts, before taxes
|
31
|
|
|
Cost of sales
|
Total, before taxes
|
556
|
|
|
|
Income tax expense (benefit)
|
195
|
|
|
Income taxes
|
Total, net of tax
|
$
|
361
|
|
|
|
Amortization of pension and other post-retirement benefits:
|
|
|
|
Actuarial gain (loss) and prior service costs, before taxes
|
$
|
(6,746
|
)
|
|
(a)
|
Income tax expense (benefit)
|
(1,523
|
)
|
|
Income taxes
|
Total, net of tax
|
$
|
(5,223
|
)
|
|
|
|
|
|
|
|
|
(a)
|
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost (see Note 9 for additional detail).
|
In August 2007 and December 2008, the Company made an aggregate investment of
$7.5 million
in kaléo, a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions. Tredegar owns Series A-3 Preferred Stock and Series B Preferred Stock in kaléo that, taken together, represents on a fully-diluted basis an approximate
20%
interest in kaléo. Tredegar accounts for its investment in kaléo under the fair value option. At the time of the initial investment, the Company elected the fair
value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests.
The estimated fair value of the Company’s investment was
$91.2 million
as of
June 30, 2019
and
$84.6 million
as of
December 31, 2018
. The Company recognized a dividend from and net appreciation on its investment in kaléo of
$7.1 million
(
$5.6 million
after taxes) and
$24.2 million
(
$19.9 million
after taxes) in the
second quarter
and first
six months
of
2019
, respectively, including a
$17.6 million
cash dividend declared by kaléo on March 29, 2019 and paid on April 30, 2019. Future dividends are subject to the discretion of kaléo’s board of directors. Amounts recognized associated with the Company’s investment in kaléo are included in “Other income (expense), net” in the consolidated statements of income and separately stated in the segment operating profit table in Note 11.
The Company estimates the fair value of its investment in kaléo by: (i) computing the weighted average estimated enterprise value (“EV”) utilizing both the discounted cash flow method (the “DCF Method”) and the application of a market multiple to earnings before interest, taxes, depreciation and amortization (the “EBITDA Multiple Method”), (ii) applying adjustments for any surplus or deficient working capital and estimates of contingent liabilities, (iii) adding cash and cash equivalents, (iv) subtracting interest-bearing debt, (v) subtracting a private company liquidity discount estimated at
15%
of the net result of (i) through (iv), and (vi) applying liquidation preferences and fully diluted ownership percentages to the estimated equity value computed in (i) through (v).
The Company’s estimate of kaléo’s EV as of June 30, 2019 was determined by weighting the EBITDA Multiple Method by
80%
and the DCF Method by
20%
, which was consistent with the weighting applied at December 31, 2018. The heavier weighting towards the EBITDA Multiple Method was due to its heuristic nature versus the hypothetical nature of the projections used in the DCF Method. The DCF Method projections rely on numerous assumptions and Level 3 inputs, including estimating market growth, market share, pricing, net margins (after allowances for temporary discounts, prompt pay discounts, product returns, wholesaler fees, chargebacks, rebates and copays), selling expenses, R&D expenses, general and administrative expenses, income taxes on unlevered pretax income, working capital, capital expenditures and the risk-adjusted discount rate. In addition, there are various regulatory and legal enforcement efforts, including an ongoing Department of Justice investigation related to kaléo’s Evzio business, which could have a material adverse effect on kaléo’s business that require assessment in any valuation method applied.
The table below provides a sensitivity analysis of the estimated fair value at
June 30, 2019
, of the Company’s investment in kaléo for changes in the EBITDA multiple used in applying the EBITDA Multiple Method and the changes in the weighting of the DCF Method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ Millions)
|
|
EV-to-Adjusted EBITDA Multiple
|
|
|
5.1 x
|
|
6.1 x
|
|
7.1 x
|
|
8.1 x
|
|
9.1 x
|
|
Weighting to DCF Method
|
50
|
%
|
$
|
75.4
|
|
$
|
83.3
|
|
$
|
91.2
|
|
$
|
99.1
|
|
$
|
107.0
|
|
40
|
%
|
$
|
72.3
|
|
$
|
81.7
|
|
$
|
91.2
|
|
$
|
100.7
|
|
$
|
110.2
|
|
30
|
%
|
$
|
69.1
|
|
$
|
80.1
|
|
$
|
91.2
|
|
$
|
102.3
|
|
$
|
113.3
|
|
20
|
%
|
$
|
65.9
|
|
$
|
78.6
|
|
$
|
91.2
|
|
$
|
103.8
|
|
$
|
116.5
|
|
10
|
%
|
$
|
62.7
|
|
$
|
77.0
|
|
$
|
91.2
|
|
$
|
105.4
|
|
$
|
119.6
|
|
0
|
%
|
$
|
59.6
|
|
$
|
75.4
|
|
$
|
91.2
|
|
$
|
107.0
|
|
$
|
122.8
|
|
The ultimate value of the Company’s ownership interest in kaléo will be determined and realized only if and when a liquidity event occurs, and the ultimate value could be materially different from the
$91.2 million
estimated fair value reflected in the Company’s financial statements at
June 30, 2019
.
|
|
8
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
Tredegar uses derivative financial instruments for the purpose of hedging margin exposure from fixed-price forward sales contracts in Aluminum Extrusions and exposure from currency volatility that exist as part of ongoing business operations (primarily in Flexible Packaging Films). These derivative financial instruments are designated as and qualify as cash flow hedges and are recognized in the consolidated balance sheet at fair value. The fair value of derivative instruments recorded on the consolidated balance sheets are based upon Level 2 inputs. If individual derivative instruments with the same counterparty can be settled on a net basis, the Company records the corresponding derivative fair values as a net asset or net liability.
In the normal course of business, Aluminum Extrusions enters into fixed-price forward sales contracts with certain customers for the future sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge margin exposure created from the fixing of future sales prices relative to volatile raw material (aluminum) costs, Aluminum Extrusions enters into a combination of forward purchase commitments and futures contracts to acquire or hedge aluminum, based on the scheduled purchases for the firm sales commitments. The fixed-price firm sales commitments and related hedging instruments generally have durations of not more than 12 months, and the notional amount of aluminum futures contracts that hedged future purchases of aluminum to meet fixed-price forward sales contract obligations was
$19.8 million
(
18.0 million
pounds of aluminum) at
June 30, 2019
and
$25.4 million
(
22.5 million
pounds of aluminum) at
December 31, 2018
.
The table below summarizes the location and gross amounts of aluminum futures contract fair values (Level 2) in the consolidated balance sheets as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
(In thousands)
|
Balance Sheet
Account
|
|
Fair
Value
|
|
Balance Sheet
Account
|
|
Fair
Value
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Asset derivatives:
Aluminum futures contracts
|
Accrued expenses
|
|
$
|
—
|
|
|
Accrued expenses
|
|
$
|
20
|
|
Liability derivatives:
Aluminum futures contracts
|
Accrued expenses
|
|
(1,845
|
)
|
|
Accrued expenses
|
|
$
|
(1,650
|
)
|
Net asset (liability)
|
|
|
$
|
(1,845
|
)
|
|
|
|
$
|
(1,630
|
)
|
In the event that a counterparty to an aluminum fixed-price forward sales contract chooses not to take delivery of its aluminum extrusions, the customer is contractually obligated to compensate Aluminum Extrusions for any losses on the related aluminum futures and/or forward contracts through the date of cancellation.
The table below summarizes the location and gross amounts of foreign currency forward contract fair values (Level 2) in the consolidated balance sheets as of
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
(In Thousands)
|
Balance Sheet
Account
|
|
Fair
Value
|
|
Balance Sheet
Account
|
|
Fair
Value
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Asset derivatives:
Foreign currency forward contracts
|
Prepaid expenses and other
|
|
$
|
198
|
|
|
Prepaid expenses and other
|
|
$
|
37
|
|
Liability derivatives:
Foreign currency forward contracts
|
Accrued expenses
|
|
(651
|
)
|
|
Accrued expenses
|
|
(1,090
|
)
|
Net asset (liability)
|
|
|
$
|
(453
|
)
|
|
|
|
$
|
(1,053
|
)
|
The Company's earnings are exposed to foreign currency exchange risk primarily through the translation of the financial statements of subsidiaries that have a functional currency other than the U.S. Dollar. The Company estimates that the net mismatch translation exposure between Flexible Packaging Films business unit in Brazil, Terphane Ltda.'s (“Terphane Ltda.”) U.S. Dollar quoted or priced sales and underlying Brazilian Real (“R$”) quoted or priced operating costs (excluding depreciation and amortization) is annual net costs of
R$125 million
. Terphane Ltda. has the following outstanding foreign exchange average forward rate contracts to purchase Brazilian Real and sell U.S. Dollars:
|
|
|
|
|
|
USD Notional Amount (000s)
|
Average Forward Rate Contracted on USD/BRL
|
R$ Equivalent Amount (000s)
|
Applicable Month
|
Estimated % of Terphane Ltda. R$ Operating Cost Exposure Hedged
|
|
|
|
|
|
$1,800
|
3.8826
|
R$6,989
|
Jul-19
|
65%
|
$1,800
|
3.8950
|
R$7,011
|
Aug-19
|
68%
|
$1,800
|
3.9070
|
R$7,033
|
Sep-19
|
66%
|
$1,800
|
3.9203
|
R$7,056
|
Oct-19
|
67%
|
$1,800
|
3.9331
|
R$7,080
|
Nov-19
|
67%
|
$1,800
|
3.9455
|
R$7,102
|
Dec-19
|
73%
|
$1,400
|
3.8256
|
R$5,356
|
Jan-20
|
51%
|
$1,400
|
3.8331
|
R$5,366
|
Feb-20
|
52%
|
$1,400
|
3.8377
|
R$5,373
|
Mar-20
|
49%
|
$1,400
|
3.8456
|
R$5,384
|
Apr-20
|
50%
|
$1,400
|
3.8539
|
R$5,395
|
May-20
|
51%
|
$1,400
|
3.8621
|
R$5,407
|
Jun-20
|
50%
|
$1,400
|
3.8727
|
R$5,422
|
Jul-20
|
48%
|
$1,400
|
3.8850
|
R$5,439
|
Aug-20
|
50%
|
$1,400
|
3.8964
|
R$5,455
|
Sep-20
|
49%
|
$1,400
|
3.9079
|
R$5,471
|
Oct-20
|
50%
|
$1,400
|
3.9187
|
R$5,486
|
Nov-20
|
50%
|
$1,400
|
3.9306
|
R$5,503
|
Dec-20
|
54%
|
$27,600
|
3.8887
|
R$107,328
|
|
56%
|
These foreign currency exchange contracts have been designated and qualify as cash flow hedges of Terphane Ltda.’s forecasted sales to customers quoted or priced in U.S. Dollars over that period. By changing the currency risk associated with these U.S. Dollar sales, the derivatives have the effect of offsetting operating costs quoted or priced in Brazilian Real and decreasing the net exposure to Brazilian Real in the consolidated statements of income. The net fair value of the open forward contracts was a negative
$0.5 million
as of
June 30, 2019
.
These derivative contracts involve elements of market risk that are not reflected on the consolidated balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to any forward purchase commitments are major aluminum brokers and suppliers, and the counterparties to any
aluminum futures contracts are major financial institutions. Fixed-price forward sales contracts are only made available to the best and most credit-worthy customers. The counterparties to the Company’s foreign currency cash flow hedge contracts are major financial institutions.
The pretax effect on net income (loss) and other comprehensive income (loss) of derivative instruments classified as cash flow hedges and described in the previous paragraphs for the
three and six
month periods ended
June 30, 2019
and
2018
is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Cash Flow Derivative Hedges
|
|
Three Months Ended June 30,
|
|
Aluminum Futures Contracts
|
|
Foreign Currency Forwards
|
|
2019
|
|
2018
|
|
2019
|
2019
|
|
2018
|
|
2018
|
Amount of pretax gain (loss) recognized in other comprehensive income (loss)
|
$
|
(1,192
|
)
|
|
$
|
1,457
|
|
|
$
|
—
|
|
$
|
719
|
|
|
$
|
—
|
|
|
(1,849
|
)
|
Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion)
|
Cost of
sales
|
|
|
Cost of
sales
|
|
|
Cost of
sales
|
|
Selling, general & admin
|
|
|
Cost of
sales
|
|
|
Selling, general & admin
|
Amount of pretax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income effective portion)
|
$
|
(606
|
)
|
|
$
|
712
|
|
|
$
|
16
|
|
$
|
(369
|
)
|
|
$
|
16
|
|
|
(378
|
)
|
|
Six Months Ended June 30,
|
|
Aluminum Futures Contracts
|
|
Foreign Currency Forwards
|
|
2019
|
|
2018
|
|
2019
|
2019
|
|
2018
|
|
2018
|
Amount of pre-tax gain (loss) recognized in other comprehensive income (loss)
|
$
|
(1,438
|
)
|
|
$
|
1,065
|
|
|
$
|
—
|
|
$
|
(97
|
)
|
|
$
|
—
|
|
|
(1,679
|
)
|
Location of gain (loss) reclassified from accumulated other comprehensive income (loss) into net income (effective portion)
|
Cost of
sales
|
|
|
Cost of
sales
|
|
|
Cost of
sales
|
|
Selling, general & admin
|
|
|
Cost of
sales
|
|
|
Selling, general & admin
|
Amount of pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) to net income (effective portion)
|
$
|
(1,223
|
)
|
|
$
|
944
|
|
|
$
|
31
|
|
$
|
(560
|
)
|
|
$
|
31
|
|
|
(419
|
)
|
As of
June 30, 2019
, the Company expects
$1.3 million
of unrealized after-tax losses on derivative instruments reported in accumulated other comprehensive income (loss) to be reclassified to earnings within the next 12 months. For the
three and six
month periods ended
June 30, 2019
and
2018
, net gains or losses realized, from previously unrealized net gains or losses on hedges that had been discontinued, were not material.
|
|
9
|
PENSION AND OTHER POSTRETIREMENT BENEFITS
|
Tredegar sponsors a noncontributory defined benefit (pension) plan covering certain current and former U.S. employees. The plan for salaried and hourly employees currently in effect is based on a formula using the participant’s years of service and compensation or using the participant’s years of service and a dollar amount. The plan is closed to new participants and pay for active plan participants for benefit calculations was frozen as of December 31, 2007. As of January 31, 2018, the plan no longer accrued benefits associated with crediting employees for service, thereby freezing all future benefits under the plan.
The components of net periodic benefit cost for the pension and other postretirement benefit programs reflected in the consolidated statements of income are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other PostRetirement Benefits
|
|
Three Months Ended June 30,
|
|
Three Months Ended June 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service cost
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
8
|
|
|
$
|
10
|
|
Interest cost
|
3,068
|
|
|
2,882
|
|
|
73
|
|
|
69
|
|
Expected return on plan assets
|
(3,404
|
)
|
|
(3,761
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service costs, (gains) losses and net transition asset
|
2,730
|
|
|
3,428
|
|
|
(57
|
)
|
|
(54
|
)
|
Net periodic benefit cost
|
$
|
2,394
|
|
|
$
|
2,554
|
|
|
$
|
24
|
|
|
$
|
25
|
|
|
Pension Benefits
|
|
Other Post-Retirement Benefits
|
|
Six Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service cost
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
16
|
|
|
$
|
20
|
|
Interest cost
|
6,135
|
|
|
5,764
|
|
|
146
|
|
|
138
|
|
Expected return on plan assets
|
(6,808
|
)
|
|
(7,522
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service costs, (gains) losses and net transition asset
|
5,459
|
|
|
6,856
|
|
|
(115
|
)
|
|
(108
|
)
|
Net periodic benefit cost
|
$
|
4,786
|
|
|
$
|
5,108
|
|
|
$
|
47
|
|
|
$
|
50
|
|
Pension and other postretirement liabilities were
$84.6 million
and
$88.8 million
at
June 30, 2019
and
December 31, 2018
, respectively (
$0.6 million
included in “Accrued expenses” at
June 30, 2019
and
December 31, 2018
, with the remainder included in “Pension and other postretirement benefit obligations, net” in the consolidated balance sheets). The Company’s required contributions are expected to be
$8.1 million
in
2019
. Contributions to the pension plan during the first
six months
of
2019
were
$3.6 million
. Tredegar funds its other postretirement benefits (life insurance and health benefits) on a claims-made basis; for
2019
, the Company anticipates the amount will be consistent with amounts paid for the year ended
December 31, 2018
, or
$0.3 million
.
|
|
10
|
OTHER INCOME (EXPENSE), NET
|
Other income (expense), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Gain on investment in kaléo accounted for under fair value method
|
$
|
7,100
|
|
|
$
|
5,800
|
|
|
$
|
24,182
|
|
|
$
|
14,000
|
|
Other
|
(4
|
)
|
|
57
|
|
|
24
|
|
|
89
|
|
Total
|
$
|
7,096
|
|
|
$
|
5,857
|
|
|
$
|
24,206
|
|
|
$
|
14,089
|
|
The gain on investment in kaléo accounted for under fair value method shown above for the
six months
ended
June 30,
2019, includes a cash dividend of
$17.6 million
from kaléo. See Note 7 for more details on the investment in kaléo.
The Company’s business segments are PE Films, Flexible Packaging Films and Aluminum Extrusions. Information by business segment is reported below. There are no accounting transactions between segments and no allocations to segments. Net sales (sales less freight) and operating profit from ongoing operations are the measures of sales and operating profit used by the chief operating decision maker for purposes of assessing performance.
The following table presents net sales and operating profit by segment for the
three and six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net Sales
|
|
|
|
|
|
|
|
PE Films
|
$
|
69,161
|
|
|
$
|
82,457
|
|
|
$
|
135,941
|
|
|
$
|
175,707
|
|
Flexible Packaging Films
|
33,443
|
|
|
28,304
|
|
|
67,062
|
|
|
56,741
|
|
Aluminum Extrusions
|
136,757
|
|
|
144,558
|
|
|
275,804
|
|
|
272,793
|
|
Total net sales
|
239,361
|
|
|
255,319
|
|
|
478,807
|
|
|
505,241
|
|
Add back freight
|
8,887
|
|
|
8,440
|
|
|
17,907
|
|
|
17,229
|
|
Sales as shown in the Consolidated Statements of Income
|
$
|
248,248
|
|
|
$
|
263,759
|
|
|
$
|
496,714
|
|
|
$
|
522,470
|
|
Operating Profit (Loss)
|
|
|
|
|
|
|
|
PE Films:
|
|
|
|
|
|
|
|
Ongoing operations
|
$
|
7,766
|
|
|
$
|
8,678
|
|
|
$
|
10,717
|
|
|
$
|
22,712
|
|
Plant shutdowns, asset impairments, restructurings and other
|
(1,523
|
)
|
|
(1,135
|
)
|
|
(2,901
|
)
|
|
(2,187
|
)
|
Flexible Packaging Films:
|
|
|
|
|
|
|
|
Ongoing operations
|
2,517
|
|
|
1,294
|
|
|
5,377
|
|
|
3,008
|
|
Plant shutdowns, asset impairments, restructurings and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Aluminum Extrusions:
|
|
|
|
|
|
|
|
Ongoing operations
|
14,518
|
|
|
13,156
|
|
|
26,603
|
|
|
23,355
|
|
Plant shutdowns, asset impairments, restructurings and other
|
(17
|
)
|
|
(46
|
)
|
|
(57
|
)
|
|
(99
|
)
|
Total
|
23,261
|
|
|
21,947
|
|
|
39,739
|
|
|
46,789
|
|
Interest income
|
48
|
|
|
228
|
|
|
107
|
|
|
284
|
|
Interest expense
|
1,263
|
|
|
1,577
|
|
|
2,495
|
|
|
3,221
|
|
Gain (loss) on investment in kaléo accounted for under fair value method
|
7,100
|
|
|
5,800
|
|
|
24,182
|
|
|
14,000
|
|
Stock option-based compensation costs
|
898
|
|
|
305
|
|
|
1,313
|
|
|
391
|
|
Corporate expenses, net
|
9,331
|
|
|
6,824
|
|
|
17,492
|
|
|
14,740
|
|
Income (loss) before income taxes
|
18,917
|
|
|
19,269
|
|
|
42,728
|
|
|
42,721
|
|
Income taxes (benefit)
|
4,440
|
|
|
4,547
|
|
|
8,467
|
|
|
9,834
|
|
Net income (loss)
|
$
|
14,477
|
|
|
$
|
14,722
|
|
|
$
|
34,261
|
|
|
$
|
32,887
|
|
The following table presents identifiable assets by segment at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2019
|
|
December 31, 2018
|
PE Films
|
$
|
232,316
|
|
|
$
|
231,720
|
|
Flexible Packaging Films
|
63,826
|
|
|
58,964
|
|
Aluminum Extrusions
|
288,715
|
|
|
281,372
|
|
Subtotal
|
584,857
|
|
|
572,056
|
|
General corporate
|
105,474
|
|
|
100,920
|
|
Cash, cash equivalents and restricted cash
|
39,769
|
|
|
34,397
|
|
Total
|
$
|
730,100
|
|
|
$
|
707,373
|
|
The following tables disaggregate the Company’s revenue by geographic area and product group for the
three and six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Geographic Area (a)
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
United States
|
$
|
162,788
|
|
|
$
|
171,185
|
|
|
$
|
335,042
|
|
|
$
|
330,747
|
|
Exports from the United States to:
|
|
|
|
|
|
|
|
Asia
|
24,513
|
|
|
18,884
|
|
|
38,006
|
|
|
42,476
|
|
Canada
|
5,872
|
|
|
14,239
|
|
|
9,477
|
|
|
27,537
|
|
Europe
|
1,517
|
|
|
1,697
|
|
|
2,877
|
|
|
3,519
|
|
Latin America
|
2,670
|
|
|
3,654
|
|
|
5,537
|
|
|
6,706
|
|
Operations outside the United States:
|
|
|
|
|
|
|
|
Brazil
|
27,582
|
|
|
23,659
|
|
|
55,721
|
|
|
46,811
|
|
The Netherlands
|
8,450
|
|
|
11,394
|
|
|
18,037
|
|
|
23,322
|
|
Hungary
|
5,162
|
|
|
8,519
|
|
|
11,996
|
|
|
17,337
|
|
China
|
—
|
|
|
1,692
|
|
|
230
|
|
|
3,966
|
|
India
|
807
|
|
|
396
|
|
|
1,884
|
|
|
2,820
|
|
Total
|
$
|
239,361
|
|
|
$
|
255,319
|
|
|
$
|
478,807
|
|
|
$
|
505,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Product Group
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
PE Films:
|
|
|
|
|
|
|
|
Personal care materials
|
37,956
|
|
|
55,985
|
|
|
82,812
|
|
|
117,629
|
|
Surface protection films
|
29,253
|
|
|
24,918
|
|
|
49,142
|
|
|
54,733
|
|
LED lighting products & other films
|
1,952
|
|
|
1,555
|
|
|
3,987
|
|
|
3,345
|
|
Subtotal
|
69,161
|
|
|
82,458
|
|
|
135,941
|
|
|
175,707
|
|
Flexible Packaging Films
|
33,443
|
|
|
28,304
|
|
|
67,062
|
|
|
56,741
|
|
Aluminum Extrusions:
|
|
|
|
|
|
|
|
Nonresidential building & construction
|
69,019
|
|
|
72,442
|
|
|
138,657
|
|
|
137,629
|
|
Consumer durables
|
16,381
|
|
|
17,161
|
|
|
31,926
|
|
|
32,309
|
|
Distribution
|
8,739
|
|
|
12,031
|
|
|
17,312
|
|
|
22,961
|
|
Automotive
|
12,496
|
|
|
11,157
|
|
|
25,123
|
|
|
20,787
|
|
Residential building & construction
|
10,278
|
|
|
12,343
|
|
|
21,950
|
|
|
21,813
|
|
Machinery & equipment
|
9,471
|
|
|
9,867
|
|
|
19,394
|
|
|
19,144
|
|
Electrical
|
10,373
|
|
|
9,556
|
|
|
21,442
|
|
|
18,150
|
|
Subtotal
|
136,757
|
|
|
144,557
|
|
|
275,804
|
|
|
272,793
|
|
Total
|
239,361
|
|
|
255,319
|
|
|
478,807
|
|
|
505,241
|
|
See the previous page for a reconciliation of net sales to sales (as shown in the consolidated statements of income).
|
|
(a)
|
Export sales relate primarily to PE Films. Operations outside the U.S. in The Netherlands, Hungary, China and India also relate to PE Films. Operations in Brazil are primarily related to Flexible Packaging Films, but also include PE Films operations. Sales from locations in The Netherlands and Hungary are primarily to customers located in Europe. Sales from locations in China (Guangzhou and Shanghai) are primarily to customers located in China, but also include other customers in Asia.
|
Tredegar recorded tax expense of
$8.5 million
on pretax net income of
$42.7 million
in the first
six months
of
2019
. Therefore, the effective tax rate in the first
six months
of
2019
was
19.8%
, compared to
23.0%
in the first
six months
of
2018
. The quarterly effective tax rate is an estimate based on a proration of the components of the Company’s estimated annual effective tax rate and discrete items recorded during the first
six months
of the year. The significant differences between the U.S. federal statutory rate and the effective income tax rate for the
six months
ended
June 30, 2019
and
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except percentages)
|
2019
|
|
2018
|
Six Months Ended June 30,
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Income tax expense at federal statutory rate
|
$
|
8,972
|
|
|
21.0
|
|
|
$
|
8,971
|
|
|
21.0
|
|
U.S. Tax on Foreign Branch Income
|
1,808
|
|
|
5.0
|
|
|
736
|
|
|
1.7
|
|
Foreign rate differences
|
1,191
|
|
|
3.3
|
|
|
669
|
|
|
1.6
|
|
State taxes, net of federal income tax benefit
|
468
|
|
|
1.1
|
|
|
537
|
|
|
1.2
|
|
Non-deductible expenses
|
217
|
|
|
0.6
|
|
|
123
|
|
|
0.3
|
|
Changes in estimates related to prior year tax provision
|
152
|
|
|
0.4
|
|
|
(34
|
)
|
|
(0.1
|
)
|
Valuation allowance for capital loss carry-forwards
|
—
|
|
|
—
|
|
|
91
|
|
|
0.2
|
|
Stock-based compensation
|
(141
|
)
|
|
(0.4
|
)
|
|
176
|
|
|
0.4
|
|
Tax contingency accruals and tax settlements
|
(154
|
)
|
|
(0.4
|
)
|
|
100
|
|
|
0.2
|
|
Research and development tax credit
|
(255
|
)
|
|
(0.7
|
)
|
|
(188
|
)
|
|
(0.4
|
)
|
Foreign Derived Intangible Income (FDII)
|
(445
|
)
|
|
(1.2
|
)
|
|
(309
|
)
|
|
(0.7
|
)
|
Tax impact of dividend received
|
(919
|
)
|
|
(2.2
|
)
|
|
—
|
|
|
—
|
|
Foreign tax incentives
|
(1,074
|
)
|
|
(3.0
|
)
|
|
(655
|
)
|
|
(1.5
|
)
|
Valuation allowance due to foreign losses and impairments
|
(1,353
|
)
|
|
(3.7
|
)
|
|
(383
|
)
|
|
(0.9
|
)
|
Effective income tax rate
|
$
|
8,467
|
|
|
19.8
|
|
|
$
|
9,834
|
|
|
23.0
|
|
Tredegar accrues U.S. federal income taxes on unremitted earnings of all foreign subsidiaries where required. However, due to changes in the taxation of dividends under the U.S. Tax Cuts and Jobs Act of 2017, Tredegar will only record U.S. federal income taxes on unremitted earnings of its foreign subsidiaries where Tredegar cannot take steps to eliminate any potential tax on future distributions from its foreign subsidiaries.
The Brazilian federal statutory income tax rate is a composite of
34.0%
(
25.0%
of income tax and
9.0%
of social contribution on income). Terphane Ltda.’s manufacturing facility in Brazil is the beneficiary of certain income tax incentives that allow for a reduction in the statutory Brazilian federal income tax rate to
15.25%
levied on the operating profit on certain of its products. The incentives have been granted for a
10
-year period, from the commencement date of January 1, 2015. The benefit from the tax incentives was
$1.1 million
and
$0.7 million
in the first
six months
of
2019
and
2018
, respectively.
Tredegar and its subsidiaries file income tax returns in the U.S., various states, and jurisdictions outside the U.S. With exceptions for some U.S. states and non-U.S. jurisdictions, Tredegar and its subsidiaries are no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2014.
The Company includes tax-related interest and penalties in income tax expense. As of
June 30, 2019
,
$0.2 million
of interest and penalties are accrued as a tax liability. During the first half of
2019
, a minimal amount of net interest income was recorded.
|
|
13
|
NEW ACCOUNTING PRONOUNCEMENTS
|
New accounting pronouncements adopted in 2019:
ASU 2016-02, LEASES (TOPIC 842)
In February 2016, the Financial Accounting Standards Board (“FASB”) issued a revised standard on lease accounting. Lessees will need to recognize virtually all of their leases with a term longer than 12 months on the balance sheet, by recording a right-of-use (“ROU”) asset and lease liability. The revised standard requires additional analysis of the components of a transaction to determine if a right-of-use asset is embedded in the transaction that needs to be treated as a lease. Substantial additional disclosures are also required by the revised standard. The revised standard is effective for the Company for fiscal years beginning after December 31, 2018, including the interim periods within those fiscal years. A modified retrospective transition approach which requires a cumulative-effect adjustment to the opening balance of retained earnings on the effective date is required for leases existing at, or entered into after, the effective date, with certain practical expedients available. The Company elected to use certain transition practical expedients that allow it to elect to not reassess: i) whether expired or existing contracts contain leases under the new definition of a lease; ii) lease classification for expired or existing leases; and iii) whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. The Company adopted the new guidance in the first quarter of 2019, electing the modified retrospective transition approach. The adoption did not have a material effect on the Company’s consolidated financial statements. The most significant impact of the new standard was the recognition of new ROU assets of approximately
$21 million
and lease liabilities of approximately
$22 million
for real estate, office equipment and vehicle operating leases.
ASU 2017-12, DERIVATIVES AND HEDGING (TOPIC 815)
In August 2017, the FASB issued amended guidance on the accounting for hedging activities. The amended guidance makes more hedging strategies qualify for hedge accounting. After initial qualification, the amended guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test, if the company can reasonably support an expectation of effectiveness throughout the term of the hedge. The amended guidance is effective for annual and interim periods beginning after January 1, 2019, but may be adopted immediately. The Company adopted the amended guidance in the first quarter of 2019 and there was no impact from adoption on the Company’s consolidated financial statements.
ASU 2018-2, REPORTING COMPREHENSIVE INCOME (TOPIC 220)
In February 2018, the FASB issued ASU 2018-2 to provide entities an option to reclassify certain “stranded tax effects” resulting from the recent U.S. tax reform from accumulated other comprehensive income (AOCI) to retained earnings. This new standard takes effect for all entities in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company has elected to not reclassify the income tax effects resulting from tax reform from AOCI to retained earnings.
Accounting Standards Not Yet Implemented:
ASU 2016-13, FINANCIAL INSTRUMENTS - CREDIT LOSSES (TOPIC 326)
In June 2016, the FASB issued ASU 2016-13 related to the measurement of credit losses on financial instruments. The pronouncement replaces the incurred loss methodology to record credit losses with a methodology that reflects the expected credit losses for financial assets not accounted for at fair value with gains and losses recognized through net income. This standard is effective for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted for fiscal years, and interim periods therein, beginning after December 15, 2018. The Company is in the process of evaluating the guidance and expects to adopt ASU 2016-13 in the first quarter of 2020, with no material impact on the Company’s consolidated financial statements.
ASU 2018-13, FAIR VALUE MEASUREMENT (TOPIC 820)
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance by removing and modifying certain disclosure requirements, while also adding new disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all companies for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for all amendments. Further, a company may elect to early adopt the removal or modification of disclosures immediately and delay adoption of the new disclosure requirements until the effective date. The Company plans to adopt all disclosure requirements in the first quarter of 2020, with no material impact on the Company’s consolidated financial statements.
Tredegar has various lease agreements with terms up to 12 years, including leases of real estate, office equipment and vehicles. Some leases include options to purchase, terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company has elected to not record short-term leases with an original lease term of one year or less in the consolidated balance sheet. To the extent such leases contain renewal options that the Company intends to exercise, the related ROU asset and lease liability are included in the consolidated balance sheet. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). The Company generally accounts for the lease and non-lease components as a single lease component.
Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating Leases
Operating leases are included in “Right-of-use lease assets”, “Lease liabilities - short-term” and “Lease liabilities - long-term” on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates, adjusted for term and geographic location using country-based swap rates. From reviewing the lease contracts in the implementation effort, the Company found no instance where it could readily determine the rate implicit in the lease.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Depending upon the specific use of the ROU asset, lease expense is included in the “Cost of goods sold”, “Freight”, “Selling, general and administrative”, and “Research and development” line items on the consolidated statements of income. Lease income is not material to the results of operations for the three and
six months ended June 30,
2019
.
The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of
June 30, 2019
.
|
|
|
|
|
(In thousands)
|
|
As of June 30, 2019
|
Maturity of Lease Liabilities
|
Future Lease Payments
|
2019 (remaining)
|
|
1,747
|
|
2020
|
|
3,507
|
|
2021
|
|
3,397
|
|
2022
|
|
2,484
|
|
2023
|
|
2,378
|
|
Thereafter
|
|
12,288
|
|
Total undiscounted operating lease payments
|
|
25,801
|
|
Less: Imputed interest
|
|
4,625
|
|
Present value of operating lease liabilities
|
|
21,176
|
|
|
|
|
Balance Sheet Classification
|
|
|
Lease liabilities, short-term
|
|
2,650
|
|
Lease liabilities, long-term
|
|
18,526
|
|
Total operating lease liabilities
|
|
21,176
|
|
|
|
|
Other Information:
|
|
|
Weighted-average remaining lease term for operating leases
|
|
9 Years
|
|
Weighted-average discount rate for operating leases
|
|
4.34
|
%
|
Rental expense was
$5.2 million
in 2018. Rental commitments under all noncancellable leases as of December 31, 2018, were as follows:
|
|
|
|
|
|
(In thousands)
|
|
2019
|
$
|
4,445
|
|
2020
|
4,007
|
|
2021
|
3,591
|
|
2022
|
2,391
|
|
2023
|
1,245
|
|
Remainder
|
2,630
|
|
Total minimum lease payments
|
$
|
18,309
|
|
Cash Flows
An initial right-of-use asset of
$21 million
was recognized as a non-cash asset addition and an initial lease liability of
$22 million
was recognized as a non-cash liability addition with the adoption of the new lease accounting standard.
Operating Lease Costs
Operating lease costs were
$1.5 million
and
$2.9 million
in the
second quarter
and first
six months
of 2019, respectively. These costs are primarily related to long-term operating leases, but also include amounts for variable leases and short-term leases.
On June 28, 2019, Tredegar entered into a
$500 million
five-year, secured revolving credit agreement (“Credit Agreement”), with an option to increase that amount by
$100 million
. The Credit Agreement amends and restates the Company’s previous
$400 million
five-year, secured revolving credit agreement that was due to expire on March 1, 2021.
Borrowings under the Credit Agreement bear an interest rate of LIBOR plus a credit spread and commitment fees charged on the unused amount under the Credit Agreement at various indebtedness-to-adjusted EBITDA levels as follows:
|
|
|
|
|
|
|
|
Pricing Under Credit Revolving Agreement (Basis Points)
|
Indebtedness-to-Adjusted EBITDA Ratio
|
Credit Spread
Over LIBOR
|
|
Commitment
Fee
|
> 3.5x but <= 4.0x
|
200.0
|
|
|
40
|
|
> 3.0x but <= 3.5x
|
187.5
|
|
|
35
|
|
> 2.0x but <= 3.0x
|
175.0
|
|
|
30
|
|
> 1.0x but <= 2.0x
|
162.5
|
|
|
25
|
|
<= 1.0x
|
150.0
|
|
|
20
|
|
At June 30, 2019, the interest cost on debt borrowed under the Credit Agreement was priced at one-month LIBOR plus the applicable credit spread of
162.5
basis points.
The most restrictive covenants in the Credit Agreement include:
|
|
•
|
Maximum indebtedness-to-adjusted EBITDA (“Leverage Ratio”) of
4.00
x;
|
|
|
•
|
Minimum adjusted EBITDA-to-interest expense of
3.00
x; and
|
|
|
•
|
Maximum aggregate distributions to shareholders over the term of the Credit Agreement of
$130 million
plus, beginning with the fiscal quarter ended June 30, 2019,
50%
of net income and, at a Leverage Ratio of equal to or greater than
3.00
x, a limitation on such payments for the succeeding quarter at the greater of (i)
$4.75 million
and (ii)
50%
of consolidated net income for the most recent fiscal quarter.
|
The Credit Agreement is secured by substantially all of the Company’s and its domestic subsidiaries’ assets, including equity in certain material first-tier foreign subsidiaries. As of June 30, 2019, Tredegar was in compliance with all financial covenants in the Credit Agreement.